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Premier Food’s Power Brands pull their weight, relief ‘palpable’: City

By Mike Stones , 23-Oct-2012
Last updated on 24-Oct-2012 at 15:29 GMT

Britain’s biggest food manufacturer Premier Foods reported a 2% rise in underlying sales growth in an interim management statement covering the three months to September 30 that drew both praise and relief from City analysts.

The improved performance was driven by Power Brand sales, which rose by 2% on the year. Grocery and Power Brand sales were up by 4.1%, with additional overhead cost reductions of £20M predicted for next year. Full year expectations remain unchanged, said the firm.

Shore Capital analysts Clive Black and Darren Shirley said: Well done to Premier Foods.”

The performance, in markets characterised by rising input prices and “distinctly anaemic” demand in many ambient categories, was “a credit to Michael Clarke and his team”.

They added: “With cfo [chief financial officer] Mr Moran, he [Clarke] has brought in necessary and commendable control to the business.” While the tough market dissipated the upgrade potential for Premier, “that modest sense of disappointment is offset by a palpable sense of relief and the shares may respond positively today on that basis alone”, they continued.

Behind the scenes

But much work remained to be done in the bread sector. “We sense that much is happening behind the scenes in the bread industry at present, a segment negatively impacted by an increased focus among the supermarkets on in-store baked lines, very heavy promotional activity in plant bread and a live debate on distribution structures in the channel − which remain fragmented and store−by−store,” said Black and Shirley.

While Premier is working “hard to make progress in bread”, supply chain inefficiencies due to a poor quality UK wheat harvest leading to a need to review procurement plans were likely to impact performance, they said.

The firm also disclosed it had lost a bread contract with an unnamed retailer valued at £75M.

Premier’s disposals had generated “sufficient funds to create space for management to focus on operations, especially cost reduction”.

In the second half of this year about £275M of funds were expected to be generated. That should take year-end net funds to about £950M. Black and Shirley said that was “clearly very good news because we believe it is solvency ratios that are key to rating expansion of the business”.

Shore’s forecast did not include £200M proceeds from the sweet spreads and jellies disposal, which was expected to completed later this month.

Management predicted an extra £20M of cost savings next year, taking the total gross savings to £60M. Shirley and Black said there may be scope to upgrade 2013 trading profit by about £10M, “assuming an effective Christmas 2012 campaign; as the company states, Christmas is an important trading period for the company”.

Shore estimated a current pre-tax profit of £67M after £21M of restructuring costs. But continued cost savings could lead to a upgrade.

Rating expansion

Shirley and Black retained their ‘Hold’ advice, commenting: “In a competitive supermarket segment, we will retain the luxury of watching and waiting, although for the more brave, Premier may be closer to rating expansion than it has been for some time.”

Damian McNeela, analyst with Panmure Gordon, highlighted Premier’s continuing debt burden.

The firm’s shares were trading on 7.6x earnings value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA)  this year falling to 6.8x EV/EBITDA for 2013. “Given the challenges posed by its outstanding net debt position, we forecast [more than] £1,123 at year end and £260M pension deficit, we retain our ‘Hold’ recommendation and 90p target price.”

Michael Clarke, Premier’s ceo, said: “I'm delighted that we've grown sales of our grocery Power Brands for a third successive quarter despite the challenging consumer environment. This underlines the substantial progress we have made this year in stabilising the business and delivering against our strategic priorities.”

Clarke added: “We have a solid programme in place for the important Christmas trading period and our Full Year expectations are unchanged.”

 

Premier Foods in numbers

£289M − Total branded sales in Q3

£375M – Value of non-branded sales, excluding milling, up by 2%

4.1% − Power Brand sales in the grocery division, which excludes Hovis

£60M – Total net savings expected by 2013

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